What’s good for the goose, is good for gander: the case of China’s Infrastructure Bank

This article recently featured in Australian Financial Review on July 3, 2015.

When the Australian Treasurer visits the Great Hall of the People in Beijing to sign up the nation to the Asian Infrastructure Investment Bank (AIIB) it could reap big dividends, but not as you might expect.

Of course Asia needs more infrastructure and the sooner the better. Recycling China’s massive foreign exchange reserves of almost $4 trillion into roads, schools, fresh water, sanitation and cleaner energy is tantalising for an export nation like Australia.

But unfortunately as Australia’s experience can attest, more dollars directed to infrastructure brings no guarantees of better growth, more productivity or higher living standards. The root cause of this conundrum is not having a robust infrastructure governance framework to identify projects that will consistently yield the best ‘net benefits’ for society.

The Treasurer has rightly pointed to transparency and accountability as being a key for AIIB to lock in Australia’s membership. Because he well knows that transparency enables sunlight to illuminate infrastructure decision processes, where accountability and high likelihood of scrutiny acts to sanitise poor and at times corrupt decisions.

This is an absolutely proper standard for AIIB, but why has Australia exempted itself?

Not a lot is known about the AIIB but its clear in objective, to drive stronger regional economic growth; poverty alleviation does not figure in its mandate.

According to the Chinese, the logic for the AIIB is to redress deep dissatisfaction with

Bretton Woods institutions such as IMF and World Bank. They are perceived to be cumbersome to deal with, overly bureaucratic, have confusing and multiple objectives and are wasteful with resources that together impact on the quality of infrastructure investments.

Regardless of the merits of these accusations, there is an uncanny parallel with Australia. Economic efficiency of Australia’s infrastructure has been waning for over a decade. For example labour productivity in electricity, gas and water is 30 per cent lower than a decade ago in part reflecting government owned enterprises being overloaded with too many objectives, spanning commercial, social and fiscal arenas.

Inevitably these objectives while important have been executed inconsistently and sometimes with perverse effect. The reliability of electricity supply is a case in point. It traverses economic and social objectives, however widespread ‘gold plating’ and extravagant use of scarce capital occurred without a proper governance framework.

SMART has estimated that a better infrastructure governance framework could deliver the nation a massive saving exceeding $4-5 billion a year, from better planning, improved procurement techniques and cutting green and red tape.

This goes to the heart of the Chinese concerns, which has been replicated at a global level, and Australia must also heed it as an important reform lesson too.

But the task before Australia is to follow through with its demands on making the AIIB a case example of good infrastructure governance. Its authority to do this would be strengthened if Australia had a better track record in this area.

So while some may be counting the benefits of AIIB as being principally about more trade, investment opportunities and jobs for Australians the potential dividends extend well beyond these direct benefits.

If AIIB lives up to its rhetoric of seeking to push the boundary for better practice in infrastructure governance, and it appears Australia will goad it along, then the scene is set for reform. Put another way, surely for Australia to have any international credibility on this matter it must close the gap between what it expects of AIIB and the way it conducts itself domestically.

Just as the G20 Infrastructure Hub has aspirations of shifting the best practice curve for infrastructure governance, there is an important opportunity for Australia to connect these different initiatives into a coherent single framework.

The starting point for reaping the benefits of our imminent AIIB membership, along with the G20 Hub is to recognise that Australia’s track record for sound infrastructure governance is at low ebb and in urgent need of reform. Having the courage to admit this coupled with humility to learn from those abroad on the same journey is a good starting place to bank the dividends of these international initiatives.